Monthly Archives: March 2011

The Social Contract In Australia

Our Very Own Quango

There’s some discussion about a buyer’s strike being put forward by the Get Up! crowd. I tend to think if you cant afford it, then you’re already at the picket line of a buyer’s strike. If you can afford it, then you’re a scab, but hey, you only have to look after your own interests in a market.

Anyway, in light of the campaign, some articles have popped up, but this one had this interesting passage:

Australian housing doesn’t have anything to do with economics. It long since ceased being a “market” at all.

Rather, it is a political complex – a quango – that represents the single largest page in the socio-economic contract between the government, the Australian financial system and an ageing baby-boomer population.

When the baby-boomer generation first took power and reshaped Australia in the 1980s, the promise was for a new kind of meritocracy.

The old “Australian Settlement” described brilliantly by Paul Kelly in The End of Certainty – a protectionist social contract between unions, industry, government and the people – was swept aside in favour of a neoliberal vision.

That bit kicks off an interesting historical analysis of just what happened to the Australian property market, which is now experiencing historically anomalous prices. The rest of it makes for interesting reading so do stick with it. For those who think that the Property prices aren’t artificially propped up by the government, the RBA and the banks, then this passage alone might help you understand that it’s been propped up very nicely:

The final death knell of the new vision surely came in 2003 when the old national good luck arrived in the nick of time.

As the housing quango lay dying in 2003, along came a commodities boom the likes of which nobody had seen in century. The transformation was complete.

The entrepreneurial vision of those pioneering ’80s baby-boomers replaced with happy-jack dirt salesmen and a bloated entitlement state that now had the money to keep its most hideous progeny, the great, quivering housing sack that hung from its belly, alive.

Staying alive

In 2008, when the world woke up and the mutated vision was revealed in all its horrible form, the government deployed every available mechanism to keep the thing alive.

Unheard of guarantees across the financial system, moral hazards like leaves in the wind, wholesale immigration, massive direct subsidies, huge general stimulus.

This might be forgivable if it was at least honest and openly declared. But it wasn’t and isn’t. Instead, those that had sat outside the system, hoping for a house or sagely planning to swoop when the bubble burst, are insulted with blandishments about how robust the system is, how they missed out on the “market”.

Even though this so-called “market” long since ceased to bear any relation to laws of supply and demand.

Rather than let it be a market, and fall, authorities insult them again and again with “affordability” programs. Just yesterday, a reader sent me a link to a Victorian government program that is running a lottery for first-home buyers to win a new home at 25 per cent off.

I don’t really know if the absence of affordability immediately translates into a crisis as such. I am, however, quite suspicious of a ‘market’ that keeps staying aloft in light of the global financial crisis that has brought property prices crashing in other parts of the world. The absence of corrections, as engineered by the Federal Government clearly is an artificial, distorting force in the market place.

When I think about it, I don’t mind property speculators speculating, even, but the fact that the government and the RBA and banks won’t let property prices go down according to the market’s dictates, means those speculators are all protected. People go on about the moral hazards for banks, but it seems people with mortgages in Australia are being bailed out by the very same moral hazard. That part of it does seem incredibly unfair, given that nobody bails out renters, stock speculators and people with money in dodgy Superannuation schemes who then get told they owe the tax office tons of money.

That’s not the only thing going in the SMH today. Here’s yet another interesting article on the same topic but on a different tangent, covering Negative Gearing.

By contrast, the Australian income tax system provides substantial incentives for people to borrow money to acquire property, shares or other assets with a value they expect will appreciate over time. Unlike most other countries, it has always been possible in Australia to deduct any excess of interest payments on loans taken out to fund an investment over the income produced by that investment to reduce the tax payable on wage or salary income.

Since the Howard government’s decision in 1999 to tax capital gains at half the rate applicable to the same amount of wage and salary income, a decision that was supported by the then opposition, ”negative gearing” has become a means not only of deferring tax, but also permanently reducing it.

In 1998-99, when capital gains were last taxed at the same rate as other types of income (less an allowance for inflation), Australia had 1.3 million tax-paying landlords who in total made a taxable profit of almost $700 million. By 2007-08, the latest year for which statistics are available, the number of tax-paying landlords had risen to 1.7 million, but they collectively lost more than $8.6 billion, largely because the amount they paid out in interest rose more than fourfold (from about $5 billion to more than $20 billion over this period), while the amount they collected in rent ”only” slightly more than doubled (from $11 billion to $24 billion), as did other (non-interest) expenses.

If all the 1.2 million landlords who reported net losses in 2007-08 were in the 38 per cent income tax bracket, their ability to offset those losses against their other taxable income would have cost more than $4.8 billion in revenue forgone; if (say) a fifth of them had been in the top tax bracket, then the cost to revenue would have been more than $5 billion.

This is a pretty big subsidy from people who are working and saving to people who are borrowing and speculating (since those landlords who are making ”running losses” on their property investments expect to more than make up those losses through capital gains when they eventually sell them).

That right there is the Quango the earlier article was talking about. That’s our social contract in this country. If the speculators are encouraged to speculate by tax law AND they can’t lose, is it really incorrect to say the system is rigged? I guess the answer is that you’d be an idiot not to jump in, and that is exactly what’s been going on for years and years.

As David Llewellyn-Smith says in the first article, a buyer’s strike isn’t the answer. But it’s going to be a hell of government that’s going to find the will power to break out of the Quango.

Don’t Look Away, Deflation Is Here

It’s been an interesting week with Colorado going bankrupt thanks to Private Equity Fuck-ups, much like how the Borders/Angus&Robertson chain has gone into administration. Suddenly they’re flogging their wares at cut prices. A&R will  close another 12 stores and 102people will lose their jobs.

In amidst of all that is this article saying heavy discounting buoys retail sales.

Retail spending increased 0.5 per cent in February, to a seasonally adjusted $20.535 billion, the Australian Bureau of Statistics (ABS) reported today.

Economists’ forecasts had centred on a 0.3 per cent rise in the month.Unlike the 0.4 per cent rise in January, sales in February were driven higher by spending on discretionary items, such as household goods, and on items excluding food, said JPMorgan economist Helen Kevans.

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‘‘That suggests consumers are showing less caution than we thought,’’ Ms Kevans said.

The rise in household goods sales suggested a strong increase in sales volumes, due to heavy discounting, she said.

‘‘In the wake of the rate hike (in November 2010), they weren’t even attracted to discounting, but now they are.’’

That’s curious, but then again if Borders and Angus&Robertson and Colorado and JAG and all those stores are hurling goods out at a discount, then there’s going to be a discount war; it’s not surprising at a certain price point people felt like it was worth spending the money.

I hate to break this to people but this kind of price war is going to lead to the sort of deflationary spiral Japan experienced. This is exactly how it started. You read it here first.

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